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European bonds decline amid speculation rally losing momentum

By Neal Armstrong & Eshe Nelson

The euro-area’s higher-yielding government bonds declined amid speculation a rally that has driven borrowing costs to record lows is losing momentum.

Portugal’s 10-year bonds fell for a fourth day, while those of Spain and Italy declined for a second day. Securities from Portugal to Greece have surged since June 5, adding to this year’s rally, when the European Central Bank announced a package of stimulus measures to boost liquidity in the euro area. German bunds fell for the first time since June 10 as stocks snapped a two-day drop, damping demand for the safest fixed-income assets.

“There’s been a fantastic rally and the bias in the market is to look for an excuse to shorten up on duration,” said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in London. “We have seen some decent outflows from eurozone funds, both in the core and periphery, and that’s beginning to weigh on the market.”

Portugal’s 10-year yield rose five basis points, or 0.05 percentage point, to 3.46 percent at 11:57 a.m. London time after falling to 3.23 percent on June 10, the least since 2005. The 5.65 percent bond maturing February 2024 fell 0.405, or 4.05 euros per 1,000-euro ($1,357) face amount, to 117.68.

The average yield to maturity on bonds from Greece, Ireland, Italy, Portugal and Spain fell to 1.91 percent on June 9, the lowest since the formation of the currency bloc in 1999, according to Bank of America Merrill Lynch indexes. It was at 1.97 percent as of Monday.